First Hawaiian Q2 2025 Earnings Call Transcript

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July 25, 2025

Key Takeaways

  • Positive Sentiment: Our net income increased over 23% from the prior quarter, driven by higher net interest and noninterest income, disciplined expense control and lower provisions, including a $5.1 million benefit from California tax law.
  • Positive Sentiment: Net interest income rose to $163.6 million, up $3.1 million quarter-over-quarter, and the net interest margin improved to 3.11% with an expected increase to 3.13% in Q3.
  • Positive Sentiment: We repurchased 1 million shares for $25 million in Q2 and have $50 million of remaining authorization under our 2025 stock repurchase plan, reflecting strong capital deployment flexibility.
  • Neutral Sentiment: Total loans were essentially flat, up 0.4% driven by dealer floorplan growth offset by commercial real estate payoffs, and we now expect full-year loan growth in the low single digits.
  • Neutral Sentiment: Credit metrics remain healthy with a $4.5 million provision, allowance for credit losses coverage stable at 1.17% of loans, and nonperforming assets at 0.23% of total loans, largely well-secured.
AI Generated. May Contain Errors.
Earnings Conference Call
First Hawaiian Q2 2025
00:00 / 00:00

There are 10 speakers on the call.

Speaker 5

Thank you for standing by and welcome to the First Hawaiian Bank, Inc. Second Quarter 2025 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you'll need to press star 11 on your telephone. If your question has been answered and you'd like to remove yourself from the queue, simply press star 11 again. As a reminder, today's program is being recorded, and now I'd like to introduce your host for today's program, Kevin Haseyama, Investor Relations Manager. Please go ahead, sir.

Speaker 7

Thank you, Jonathan, and thank you, everyone, for joining us as we review our financial results for the second quarter of 2025. With me today are Bob Harrison, Chairman, President and CEO, Jamie Moses, Chief Financial Officer, and Lee Nakamura, Chief Risk Officer. We have prepared a slide presentation that we will refer to in our remarks today. The presentation is available for downloading and viewing on our website at fhb.com in the Investor Relations section. During today's call, we will be making forward-looking statements, so please refer to slide one for our Safe Harbor statement. We may also discuss certain non-GAAP financial measures. The appendix to this presentation contains reconciliations of these non-GAAP financial measurements to the most directly comparable GAAP measurements. Now I'll turn the call over to Bob.

Speaker 6

Thank you for joining us today. I'll start by giving a quick overview of the local economy. Statewide seasonally adjusted unemployment rate continued to drift lower and was 2.8% in June compared to the national unemployment rate of 4.1% through May. Total visitor arrivals were up 2.8% compared to last year as the strength in U.S. mainland arrivals more than offset weakness in the Japanese and Canadian markets. Year to date spending was $9 billion, up 6.5% compared to 2024. Interesting to note, we went back and looked and for the first five months of 2019 to the first five months of 2025, visitor arrivals are down still 3.9% but the spend is up over 24%. While there's been a few less visitors, the spend is up substantially. Turning to Slide 2, we had a very strong second quarter. Our net income increased over 23% compared to the prior quarter.

Speaker 6

The improvements in our results compared to the last quarter were broad based, driven by higher net interest and noninterest income, good expense control, and lower provision expense. Our results also include the impact from a change in California tax law that resulted in a net benefit of $5.1 million. Turning to Slide 3, the balance sheet remains solid. We continue to be well capitalized with ample liquidity. Loans and deposits were stable during the quarter and we repurchased about 1 million shares at a total cost of $25 million. We have $50 million of remaining authorization under the approved 2025 stock repurchase plan. We resumed reinvesting the investment portfolio cash flows in the second quarter and we plan on maintaining the portfolio balance at its current level. Turning to Slide 4, total loans increased about $59 million or 0.4% from the prior quarter.

Speaker 6

The largest increase was in the commercial and industrial (C&I) portfolio, which was primarily due to a $125 million increase in dealer floor plan balances. This was largely offset by payoffs from several completed construction projects in our commercial real estate portfolio. Looking forward, we expect full year loan growth will be in the low single digits. Now I'll turn it over to Jamie.

Speaker 2

Thanks, Bob. Turning to Slide 5. Total deposits increased slightly in the second quarter as growth in public deposits more than offset the decline in commercial and retail deposits. On the retail side, they were down $23 million in the quarter and commercial deposits were down $127 million. The decline in commercial deposits was due to the normal operational fluctuations that we see in that book. Total public deposits increased by $166 million, all in operating accounts. There was no change in the balance of public time deposits. Total deposit costs fell by 4 basis points in the quarter and our noninterest-bearing deposit ratio remained at 34%. On Slide 6, we see that net interest income was $163.6 million, $3.1 million higher than the prior quarter, and the NIM was 3.11%, up 3 basis points.

Speaker 6

Compared to the prior quarter.

Speaker 2

The increase in the margin was driven entirely by lower deposit costs, primarily due to CD repricing. While we didn't see the anticipated benefit from fixed asset repricing in the second quarter, the underlying balance sheet dynamics driving the NIM remain intact, and we anticipate that the NIM in the third quarter will increase a couple of basis points to 3.13%. On to slide 7, where noninterest income was $54 million in the quarter and benefited from a few items that went our way. We continue to expect that recurring piece of noninterest income will be about $51 million per quarter. Expenses were better than expected in the first half of the year, but we expect them to tick up just a bit in the back half.

Speaker 2

We think expenses in the third quarter will be up around 2% on a linked quarter basis and that full year expenses will be better than originally expected at around $506 million. Now I'll turn it over to Lee.

Operator

Thank you, Jamie. Moving to Slide 8. The bank continues to maintain its strong credit performance and healthy credit metrics. Credit risk remains low, stable, and well within our expectations. We are not observing any broad signs of weakness across either the consumer or commercial portfolios. Classified assets increased by $31.6 million on the quarter. These loans are well secured, and we continue to work closely with the borrowers. Quarter to date net charge offs were $3.3 million or 9 basis points. Year to date net charge offs were $7.1 million. Our annual year to date net charge off rate was 10 basis points, 1 basis point lower than in the first quarter.

Operator

Nonperforming assets and loans, 90 days or more past due, comprised 23 basis points of total loans and leases at the end of the second quarter, up 6 basis points from the prior quarter, resulting from an uptick in nonaccruals. Most of these were residential loans with low loan to value ratios. We feel that the loss content in these loans is very low. Moving to Slide 9, we show our second quarter allowance for credit losses broken out by disclosure segments. The bank recorded a $4.5 million provision in the second quarter. The ACL increased by $1.2 million to $167.8 million with coverage remaining flat at 1.17% of total loans and leases. We believe that we continue to be conservatively reserved and ready for a wide range of outcomes. Let me now turn the call back to Bob for any closing remarks.

Speaker 6

Thank you, Jamie and Lee, and I'll be happy to take your questions.

Speaker 5

Thank you. Our first question for today comes from the line of Liam Coohill from Raymond James & Associates Inc., your question please.

Speaker 5

Hi guys. Liam on for David. Thanks for taking my question. Just wanted to start out with C&I driving the growth in the quarter and taking into account below single digit outlook moving forward. How is the pipeline in terms of C&I and is that the largest contributor? I'm also curious on the CRE side, are we seeing increasing demand from those borrowers? Appreciate any color you might have. Thank you.

Speaker 6

Sure. No, good question. Most of the C&I growth came in our dealer floor plan and we have seen that pretty much continue to normalize back to what we had thought it would. Right about $600 million. Let's see. No, $786 million for the quarter at the end of the quarter and that's up about $125 million from the previous quarter. That moves up and down. Car sales have slowed a little bit, but still there's uncertainty out there with respect to tariffs. I think there's just, we don't know exactly what's going to happen with those balances, but we don't think they'll move around a whole lot. As it relates to commercial real estate, the thing there was that we had thought some of the commercial construction loans were going to extend into mini perms and they didn't, which is a sign of very good credit quality.

Speaker 6

On the other hand, it's a bit of a challenge for balances. We still have a lot of those loans that are funding, that work is still going on. It's a little bit harder to predict when those will get paid off. We changed our guidance a bit from low to mid single digits to low single digits for the full year just in anticipation of that.

Speaker 6

Thank you. I appreciate that you touched on tariff impact. How have you been seeing that net out with the improvement in tourism spend on the islands? Do you think it's kind of a wash between the two factors, or has that increased tourism spend kind of outpaced tariff concerns at this stage, adding softness of concerns versus last quarter?

Speaker 5

Thank you.

Speaker 6

Really no change. The only impact we really see for tariffs is the uncertainty it gives our car dealers. They're still not exactly sure what those tariffs will be. I don't think it's had much of an impact on tourism. Japanese and Canadian tourism is down. I think primarily for the Japanese it's a little bit slower economy and their exchange rate is still fairly weak for them. U.S. West and all of the continental U.S. has been strong and that's what led to the increase in arrivals and almost certainly the increase in spending.

Speaker 6

Great, thank you. Just last one for me, see the repurchase of some shares in the quarter. Just wondering what your capital priorities are at this stage as we move into.

Speaker 5

The back half of the year.

Speaker 2

Yeah, I mean, I think the capital priorities remain the same. You know, we'd love to deploy that in organic growth areas. Want to make sure our dividend's stable. The third option there is the share repurchases. I think that's where we're going to end up deploying more of our repurchase authority in the back half of the year. I think that's probably where we'll end up on that.

Speaker 2

Great.

Speaker 2

Thanks for the call. I'll step back.

Speaker 5

Thank you. Our next question comes from the line of Robert Terrell from Stephens Inc. Your question please.

Speaker 5

Hey, good morning.

Speaker 6

Morning. Morning.

Speaker 6

Maybe just to piggyback off of the last question around capital priorities. I'm looking back, your capital position is stronger than it's been in a while. You've got a lot of capital. The loan growth outlook is maybe a little bit lower following this quarter. I'm curious how these things play together into your thought process on M&A and whether M&A makes more sense for you guys at this juncture, and maybe if you could just kind of update us on your thought process there and if it does or doesn't make sense for you.

Speaker 6

Sure. This is Bob. I think that's something we always look at. We're not adverse to considering options, but we don't have anything we're looking at currently. We're always out there talking to people. As far as potentials for doing things with our capital, we're very comfortable with the capital levels. It's a little bit higher than we had guided to in years past. It was closer to 12%. We have increased the allowance. We do think there will be a rotation, as Jamie was getting to, out of securities and back into lending. When that happens, that can eat up the capital fairly quickly. We want to make sure we maintain enough capital for loan growth.

Speaker 6

Yep, makes sense. Maybe just one for Jamie. Going back to the comments around the margin, and I appreciate the guidance for 3Q, that's helpful. What impacted or anything we should be aware of that impacted loan yields in the second quarter and kind of mitigated what I thought would be a little bit better in kind of fixed repricing? Just any color you can provide on the underlying dynamics there would be helpful.

Speaker 2

Yeah, I think, Andrew, it was really a mix issue. You see in the materials we had sort of large payoffs in the construction book and increases in the C&I book. There was just this timing, I'll call it a timing differential, where we had higher margin loans pay off and they were replaced by relatively lower margin loans in the book. It was really a mix issue there. I think in totality that story still remains the same, that the fixed rate cash flows coming off the books replaced by higher yielding assets in general will drive the NIM higher over time. Just kind of a weird quarter in terms of the mix of those things at the moment.

Speaker 2

Understood. If I could sneak one more in, I think you talked about $51 million of fee income as kind of a core number. It seems like the credit and debit card fees and service charges were both up this quarter. It seems like there's normally a carry forward of strength in the third quarter there as well. I'm hoping, just to clarify, is that just what you view as core longer term as we think about third quarter on fee income?

Speaker 2

Yeah, I think fee income in the third quarter somewhere in that $51 million, $52 million range. I mean, I think that's probably where we'll be. You know, from time to time we have a lot of things that happen from a, let's call it a markets perspective where we have to revalue, you know, pension obligations, BOLI obligations, that kind of thing. When the market's up quarter over quarter, we have small pops in these numbers. We had a number of, like, let's call it onesie twosies type things happen in this quarter in the $2 million-ish range that we know happen. These things happen for us from time to time. It's just hard to predict when they'll happen. That $51 million, $52 million range, I think, is probably a good number for where we'll be in the third quarter.

Speaker 2

Great.

Speaker 2

I'll step back. Thank you for taking the questions.

Speaker 6

Thank you.

Speaker 5

Our next question comes from the line of Kelly Motta from Keefe, Bruyette & Woods, Inc. Your question, please.

Speaker 5

Hi, good morning. Thanks for the question. With regards to the tax rate I see for your DTAF this quarter that you called out in the release, Jamie, can you provide an updated outlook on what this tax law change does to your tax rate outlook for this year and beyond? Thank you.

Speaker 2

Yes. You got it, Kelly. Where normally we would say we would outlook at like 23% for our effective tax rate, the outlook for the rest of the year is 23.2% on that tax rate.

Speaker 2

Okay, so fairly immaterial. Got it.

Operator

Okay.

Operator

On the deposit costs, you've done such a great job getting your deposit cost down in the first round of rate cuts. It seems like there's a declining benefit absent future cuts, but when those do come, wondering how you're thinking about deposit betas on the next round of cuts. You are asset sensitive, but that would be a nice outset.

Speaker 2

We have talked in the past about declining betas related to tax cuts. I don't think we're fully there yet at the moment. I think we probably have a few more rounds available to us before it starts to become a real issue. I would say that from the perspective of a rate cut, if we were a 95% beta or so on our rate sensitive deposits over the last two cuts, that maybe drops to 90% or so over the next couple of cuts. We still feel pretty strongly that we'll be able to pass through a large portion of those cuts to those rate sensitive customers, but after maybe another 1% or so the beta will decline over time on that. I think 90% is an okay number for the next one or two.

Speaker 2

Oh wow, great. Got it. Last for me, just a higher picture question. Loan growth this quarter, really nice C&I, but you had the construction paydowns. It seems like the outlook is a little bit lower than at the start of the year. Quite good as you look ahead. More broadly speaking, what do you think are the main factors that would get increased activity among your client base to really pick up, and over the longer term, what's a more normalized growth rate? Do you think more mid single digits would be something that could be a longer term with these, without the payoff headwinds? Thank you.

Speaker 6

Yeah, Kelly, this is Bob. I'm a little reluctant to look out longer term, you know, just as most banks were following the economies of the areas we're in. That's kind of making a bigger forecast than I'm comfortable with. Just to talk maybe a little more specifically about what happened this quarter, one of the reasons we lowered our guidance just a tad was that we had thought some of these construction loans were going to go into mini perm. If the takeout market is as strong as it is and they're getting paid off, you know that does affect that. How much will dealer floor plan continue to grow? Hard to tell. Pre Covid I think we're at $859 million in total and now we're $786 million. We're getting close to what pre Covid numbers were. The amount of increase will likely slow down.

Speaker 6

It's really the interplay between those two. The teams are out there, they're calling on people. There's good pipelines developing, but it's just hard to at this point put that into a number between now and year end. Other than what we've done in past year end, I don't think we'd be comfortable commenting.

Speaker 2

Got it.

Speaker 2

Maybe just last follow up on those construction loans getting taken out, where are you seeing the most competition coming in? Is it from the local banks in Hawaii getting more aggressive on pricing, larger insurance companies, large banks?

Speaker 6

Yeah, this is the end of construction where normally, you know, pre Covid you get taken out right away and then sometimes post Covid, you know, it hangs around in a mini perm for a little while, which is always a feature of those loans. Now we're seeing more of a return to normalcy with institutional buyers, sometimes insurance companies, sometimes others taking out those loans upon completion of construction. It was never really designed to be a permanent loan for us. It's not other local banks.

Speaker 5

Got it.

Speaker 5

Awesome. Thank you so much. I'll step back.

Speaker 6

Thank you.

Speaker 5

Our next question comes from the line of Jared Shaw from Barclays Bank PLC. Your question please. Hey there.

Speaker 5

Thanks. Maybe just on the commercial loan growth that you're putting on, what are you seeing for spreads on C&I right now? Is that staying stable or are you seeing some compression with competition?

Speaker 2

Jared, this is Jamie. They're staying pretty stable. I think in totality we have the weighted average roll on is mid to upper sixes in totality in the books, but mostly stable.

Speaker 6

I would say the spreads.

Speaker 6

Okay, can you just walk through a little bit on the investment securities? With the decline in yield this quarter and you talked about reinvesting some of those cash flows, what are you purchasing in terms of yield and duration, and should we expect to see some recovery in the securities yield or is it staying lower here?

Speaker 2

Yeah, no, you should expect maybe 2.25% pickup on the things that we're putting back on versus the roll off. What's rolling off is about 2% in that book, and we're going to be putting on maybe somewhere between 4%.

Speaker 6

Four and a quarter.

Speaker 2

Keeping the duration a little bit, keeping the duration sort of same flat in the book. We're replacing cash flows that roll off with same type of assets that are rolling off. Mortgage securities with that are good structures and have either through collateral features or structure features that sort of give us a tight prepay window, in that five duration area.

Speaker 2

Okay. All right, thanks. Finally, for me on credit, I know we're talking about low numbers, but when you look at sort of the growth in residential mortgage nonperformers over the last few quarters, that's been pretty big compared to where you've been before. What's driving that weakness? I know that there's probably not a lot of loss content there. Is that what's sort of driving the underlying concern with the consumer on those?

Speaker 6

Jared, this is Bob, maybe I'll start and then Lee can add some comments. The consumer at, say, the lower end is getting a little stretched. Their savings that they accumulated during COVID have gone away, and it's just getting a little bit tougher. Lee, I think you'd mentioned on collateral, but anything you want to add?

Operator

No, not really. I mean, the portfolio is performing as we expected. We were pleased for a very long time with the performance, and we continue to be very pleased and confident with the portfolio.

Speaker 6

Yeah, for a very long time we had zero. Anything above zero is going to look like a big number, but we're not concerned about it from a loss perspective, as I think Lee mentioned.

Speaker 5

Yep.

Speaker 5

Okay, thank you very much.

Speaker 5

Thank you. Our next question comes from the line of Timur Braziler from Wells Fargo Securities LLC, your question please.

Speaker 5

Yes, hi, good morning. Maybe just keeping to the line of commentary on credit. The increase in commercial criticized assets, can you just help us reconcile kind of that increasing trend versus the still really strong level of charge offs, and how do you see that ultimately playing out? Do you think that is going to somehow correlate to maybe an uptick in charge off activity again off of a really low base, or do you think that ultimately they'll just end up curing themselves?

Operator

For the most part, they will end up curing themselves. We already know of two that paid off right after the end of the quarter, and then there's another one that we expect to pay off. As you mentioned, the base is so low that you just have one loan move in and it moves significantly as a percentage. Again, you know, we don't go into these without some expectation that some will have troubles. When you stay close to the borrower, you can be confident that you'll come out very satisfactorily.

Operator

Okay, thanks for that.

Speaker 5

And then.

Speaker 6

Sorry, go ahead.

Operator

No, we are confident in our book. The book is strong.

Operator

Okay, thanks for that. Maybe following up on the completed construction loans being refi'd away, I'm just trying to get the magnitude here of what's coming due from a construction completion standpoint. Similarly, on the CRE side for those resets that are approaching, I'm just wondering if you're seeing an increased level of competition from some of those potentially being.

Speaker 6

Right away as well here. Yeah, Timur, I don't have the specific numbers of what's coming up. We had three loans pay off in the quarter, which kind of led to that paydown, or several, actually. As far as we are not seeing additional competition as far as refinancing, as far as new deals coming forward, pricing had expanded a bit during COVID. It's coming back a little bit more to pre-COVID spreads, but it's still solid and I think appropriate for the risks that we're underwriting.

Speaker 6

Okay.

Speaker 6

Maybe just tying in some of the payoff activity, the fact that the dealer floor plan book here is reaching a level of stabilization and your comments around the bond book reaching a level of stabilization. Is the expectation here that we start seeing asset growth, or just given some of the dynamics, assets likely remain somewhat stagnant here for at least the near term?

Speaker 2

Yeah, Timur. I think maybe we'll see some balance sheet growth. We're going to keep the bond book stable where it's at, and we should see some loan growth in the back half of the year. I would expect a larger balance sheet by year end.

Speaker 6

Just to add to Jamie's comments, some of the things that have been a drag over the last several years, you know, our indirect book pre-COVID was well over $1 billion, $1.1 billion. Now it's $600 million. Over the, whatever it is, five and a half years, gone down by $500 plus million. That's now stabilized. You know, the market's reasonable and we don't have that headwind now. A little bit of a headwind in residential lending, as I think for all the banks here in Hawaii, but just not a lot of new volume as things mature. On the commercial side, to Jamie's point, we're optimistic. There's deals out there and we're looking at them and feel pretty good about the pipeline. Got it.

Speaker 6

Thank you for the questions.

Speaker 5

Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Kevin Haseyama for any further remarks.

Speaker 7

Thank you. We appreciate your interest in First Hawaiian and please feel free to contact me if you have any additional questions. Thanks again for joining us and have a good weekend.

Speaker 5

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.

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